Non-Recourse Funding: The Devil’s in the Details…
A growing number of “funding” companies currently offer a plaintiff with a pending personal injury lawsuit the opportunity to receive a cash advance in exchange for an agreement to repay the money when the case resolves, either by way of settlement or verdict. Known as “non-recourse lending”, the vehicle has long been available as a form of financing in the commercial real estate sector but is relatively new in the area of plaintiff’s personal injury litigation. The term “non-recourse” refers to the fact that the borrower is only required to repay the money if the case results in a recovery by the plaintiff. In the event there is no recovery on behalf of the plaintiff, the borrower is not required to repay any of the advanced funds. While non-recourse funding may benefit those in desperate need of immediate cash, there are serious issues and potential hazards about which the borrower must familiarize himself before entering into this type of agreement.
First, non-recourse funding is not a “loan” in the traditional sense, because the money advanced is contingent upon the resolution of the case. The law is clear, that if any part of the principal or interest advanced is contingent on an event that is “more than a merely colorable hazard” the agreement cannot be considered a loan. Because the money advanced by funding companies is not a loan, these companies are not regulated by the usury laws which limit the amount of interest a lender can lawfully charge under Massachusetts law. In Saladini v. Righellis, however, the Massachusetts Supreme Judicial Court reserved the right to review these types of contracts despite the fact that they are not governed by the usury laws. Specifically, the Supreme Judicial Court stated that “if an agreement to finance a lawsuit is challenged it will consider whether the fees charged are excessive or whether any recovery by a prevailing party is vitiated because of some impermissible overreaching by a financer.”
Fees charged by non-recourse lenders vary widely, as do the terms of repayment. It is therefore essential to read the fine print carefully before proceeding. For example, while some companies charge a percentage of the “gross settlement” in addition to the principal amount advanced, others charge a monthly interest rate commencing upon the date the funds are advanced to the plaintiff. The monthly interest rates typically charged in connection with this type of financing are often quite high; in some cases as high as 15% per month. The funding companies who advance money in exchange for a percentage of the gross settlement often contract to receive 4% to 10% of the settlement in addition to the return of the principal. While Saladini, does offer the consumer an avenue to have a contract reviewed with respect to excessive fees, plaintiffs must understand that courts are not in the business of routinely modifying contracts solely because the plaintiff may end up taking home less money than anticipated.
The Saladini Court stated that in reviewing these contracts the court would be guided by the rule of what is fair and reasonable, looking to all the circumstances at the time the arrangement was made to determine whether the agreement should be set aside or modified. Specifically, the court indicated the relevant factors would include the respective bargaining positions of the parties at the time the agreement was made and whether both parties were aware of the terms and the consequences of the agreement. It is unlikely that Massachusetts Courts will modify a contract because the net settlement amount to the plaintiff is less than expected when the plaintiff was well aware of the contract terms at the time of inception.
Another point that should be carefully considered by anyone entertaining this type of funding agreement is that the funding company has agreed to lend you money because they are fairly certain they will be paid back in full. After all, the funding company will require a complete copy of the relevant portions of your personal injury case before agreeing to advance this money. The reason they require such extensive documentation is so they can have their internal advisors thoroughly review the case to satisfy their own underwriting standards and better ensure that the company will be paid. A plaintiff considering this type of funding should therefore anticipate repaying 100% of the amount advanced regardless of how unfair the ultimate recovery to the plaintiff is.
Finally, if you do elect to pursue non-recourse funding, it is extremely important that there be a clause contained in your contract stating that the lender will have no control over the disposition of your personal injury case. Without this clause, there is a potential risk that the funding company could effectively prevent the settlement of your case because the company is unhappy with the proposed settlement amount.
While there may be certain limited circumstances under which this type of funding may be necessary or advantageous, it should be viewed truly as an option of last resort. A plaintiff considering this type of funding should do so only after careful consideration and with the advice of experienced legal counsel.
About Attorney Eric J. Parker
Eric J. Parker is the Managing Partner and co-founder of the Boston-based trial firm Parker Scheer LLP, with offices in Massachusetts and Nevada. Mr. Parker has 20 years of active experience as one of Massachusetts’ leading civil trial lawyers, and holds the highest peer-review rating awarded to any attorney for professional skill and ethics. Mr. Parker is a member of the American Association for Justice (formerly the Association of Trial Lawyers of America), as well as the American, Massachusetts, and Boston Bar Associations. Mr. Parker is an elected member of the American Board of Trial Advocates (ABOTA; Elected Vice President, Massachusetts Chapter, January 2007), and is a certified member of the Million Dollar Advocates Forum. In 2007, Mr. Parker was appointed to the Editorial Board of Massachusetts Lawyer Weekly, the leading weekly legal newspaper serving the Commonwealth of Massachusetts. Mr. Parker has been named a Massachusetts Super Lawyer by the publishers of Boston Magazine, every year since the distinction was first created. Mr. Parker’s legal practice focuses on plaintiff-oriented tort litigation, including product liability, motor vehicle tort, medical and dental malpractice, premises liability claims, workplace sexual harassment and assault, aviation-related injuries, and wrongful death. Mr. Parker is a graduate of Vassar College and received his Juris Doctor degree from Suffolk University Law School. In addition to his legal practice, Mr. Parker is also an FAA Certified Private Pilot, and was a founding member of the Board of Trustees of the Media And Technology Charter High School (MATCH) located in Boston (Chairman 2001-2005), the goal of which is to provide inner-city high school students with a successful college education.